Center for a New American Security

Natural resource trends topped international headlines in 2012 – from illicit resource trade in Afghanistan to energy competition in the South China Sea. Which ones should readers track in 2013? Here’s a list of the five international trends I’ll be watching in 2013, in no particular order.

1. China’s technological development in deepwater drilling. China made great strides in strengthening its technological edge in deepwater drilling last year. In May 2012, the state-run China National Offshore Oil Company, CNOOC, began operating the country's first deepwater drilling rig, putting CNOOC in a position to transform its reach by moving away from solely shallow water operations to new depths, including deepwater blocs of the South China Sea. (Chinese estimates place 70 percent of recoverable natural gas and oil deposits in deepwater of the South China Sea.)
   
   In December 2012, the Canadian government paved the way for CNOOC to acquire the Calgary-based energy giant, Nexen Inc., including the company’s high-tech ultra deepwater drilling technology, which would add to CNOOC’s technological edge in deepwater drilling. The deal still faces some scrutiny from the U.S. Congress over Nexen's Gulf of Mexico assets. Regardless though, as China continues to develop its edge in deepwater drilling technology, it could speed up the country’s efforts to unilaterally drill in deepwater blocs of the South China Sea.
2. An increasing focus on energy development in the South China Sea as part of India’s “Look East Policy.” India shares many of the same energy vulnerabilities as other countries in East Asia, particularly a growing reliance on petroleum imports from the Middle East and North Africa. Those same vulnerabilities have contributed to New Delhi’s interest in exploring for energy in the South China Sea, which some countries, including China, view as a potential “second Persian Gulf.” 
   
   India’s foray into the South China Sea has drawn China’s ire, which has protested India’s recent joint ventures with Vietnam. In December 2012, Chinese fishing boats blocked a Vietnamese seismic vessel, causing the ship’s cables to snap. The episode provoked a response from the Indian government, which said it would “consider sending navy vessels to protect its interests in the South China Sea.” This may lay the groundwork for a greater Indian naval involvement in the South China Sea in 2013; it is something worth watching. 

As I wrote in last weekend’s roundup, there is a lot of uncertainty looming in Nigeria that could impact the global oil market. A weeklong row between the government and labor unions over the government’s fuel subsidy cost Nigeria about $1.3 billion dollars. Labor unions suspended the strike early last week after Nigerian President Goodluck Johnson agreed to partially reinstate his government’s fuel subsidy.

Despite the brief respite from political turmoil, the country was rocked by a series of bombings throughout the week that reportedly left 256 dead. “The militant Muslim group Boko Haram, which is fighting for rule by Islamic law in the north, said it was responsible for blasts at eight government buildings in Kano on Jan. 20,” according to Businessweek. The same report said that:

The attacks by Boko Haram haven’t affected oil from Nigeria’s Atlantic coast, where companies including Royal Dutch Shell Plc, Exxon Mobil Corp., Chevron Corp., Total SA and Eni SpA pump more than 90 percent of the country’s crude output. Similarly, the financial markets in the southwestern commercial capital, Lagos, haven’t been disrupted by the violence.

Nevertheless, Nigeria’s instability may have long-term implications for the global oil market if violence affects the country’s oil sector. Already, “Brent oil for March settlement advanced as much as 59 cents, or 0.5 percent, to $110.45 a barrel on the London-based ICE Futures Europe exchange,” according to Businessweek.

Energy analysts will need to be watchful of developments in Nigeria as the government continues to grapple with unrest. Moreover, the fuel subsidy issue may again surface as a point of tension if fuel prices rise. According to a report from The Wall Street Journal, “Analysts worry that the [fuel] subsidy cut played into Boko Haram's antigovernment stance, helping it to channel the anger of Nigeria's young disaffected Muslims.” Thus, the issue could continue to affect stability in Nigeria.  

Nigerian President Goodluck Jonathan announced over the weekend that the government would partially reinstate fuel subsidies, prompting Nigerian labor unions to suspend a strike that threatened to halt Nigerian oil production, the fifth largest source of American oil imports. The strike began on January 9 after the government ended its $8 billion fuel subsidy program on January 1, contributing to a doubling in fuel prices – from about NGN65 ($.39) to NGN141 ($.87) per liter. The government had hoped to use the savings from the fuel subsidies to invest in infrastructure, including oil refining capacity that would enable the country to curb its dependence on importing refined oil products. Instead, the termination of the subsidies triggered massive public outcry that fueled protests and paralyzed the country.

President Jonathan said that under the partial reinstatement, fuel prices would be capped at about NGN 97 ($.60) per liter. Although Nigerian labor unions agreed to suspend their nation-wide strike, some reports note that the trade unions have not agreed to the new capped fuel prices, which may suggest only a fleeting agreement between the government and the unions. Energy analysts will remain watchful of developments in Nigeria, which could contribute to shocks in the global oil market. Indeed, while it is unclear how much oil production could be affected by future strikes given that most of the production process is automated, even minor disruptions could affect global oil prices by undermining confidence in the oil market, especially if tensions in the Persian Gulf worsen.

Nevertheless, the Nigerian government seems to have bought time, helping bring a modicum of stability to Africa’s largest oil producer, which exports more than 2 million barrels of crude oil a day and provides 11 percent of American oil imports. In the long term, however, analysts will need to keep a close eye on Nigeria, especially as other developments in the Strait of Hormuz and other sensitive regions that affect global oil prices unfold.